How dollar stores became a highly sought-after stock

(Jennifer Brown/The Star-Ledger)Dorian Bernard, a Newark resident and student at FDU checks his receipt outside the Family Dollar in Newark after buying lunch supplies for the week.

When it comes to counting pennies, Dorian Bernard will happily drive the extra block or two to shop at Family Dollar.

"I know if I can get it a buck cheaper, I’ll haul ass here," the 27-year-old Fairleigh Dickinson University student said. In his shopping bag yesterday, outside a Family Dollar in Newark’s University Heights, was $12 worth of lunch groceries for the week — including a pack of Tyson’s pre-cooked bacon, Kraft singles cheese and a loaf of bread.

"It would have cost well over $16" somewhere else, Bernard said. The bread alone was $2, down from the $3.75 loaf he shuns at the Pathmark two blocks away.

It’s shoppers like Bernard who have investors considering ownership of dollar stores. As the economy continues to sputter, more and more people flock to these discount retailers to save money on basics like paper products and home goods, many of which are name-brand.

So when a bid by Nelson Peltz’s hedge fund Trian Fund Management to purchase Family Dollar Stores for $7.7 billion was made public last month, retail analysts weren’t shocked.

"These stores are exploding in growth earnings, their cash flow is tremendous and they make a profit the first year," said Howard Davidowitz, chairman of Davidowitz & Associates, a national retail consulting firm in New York. "This is a cash-flow business, and it’s a business of the future."

The 2007 takeover of Dollar General by the private equity firm Kohlberg Kravis & Roberts was "one of their greatest investments," he added, and Family Dollar is a "brilliant place to invest."

The company’s current CEO owns 7.5 percent of the stock as of February, and is the son of store founder Leon Levine, who opened the first store in 1959 in North Carolina. Family Dollar Stores rejected the hostile takeover offer from Peltz, who is one of the company’s largest shareholders with about 8 percent of stock, and said it "substantially" undervalued the business. The company then adopted a "poison pill" option to discourage additional offers that would require a 10-percent ownership threshold and reduce the possibility anyone could gain control of the company by buying shares on the open market or without paying a premium for all shares, the company said.

In New Jersey, the stores are rapidly expanding in locations they either couldn’t afford before rents went down, or weren’t welcome when landlords preferred higher-end tenants, said retail broker Chuck Lanyard, president of Paramus-based The Goldstein Group. In the last year, Lanyard has represented competitor Dollar General in at least three deals, he said.

"Family Dollar, they’ve been very aggressive too," Lanyard said, whose company is now working on a lease for a new Family Dollar store in Bergen County.

There are nearly 6,800 Family Dollar stores nationwide, including 82 in New Jersey, and plans for an additional 300 throughout the country by August, said company spokesman Josh Braverman. Two stores in Mount Holly and Little Egg Harbor are listed as opening by the end of March on the company’s website.

"The dollar stores are getting opportunities they never had before," Lanyard said.

At one of Newark’s eight Family Dollar locations, an eight-roll pack of store-brand paper towels sells for $5, compared to the Bounty brand for $6. Packed Easter baskets were on sale for $10, and the store offered shelves full of name-brand cleaning supplies, pantry staples and health and beauty aids.

"From the standpoint that if they’re operated properly, dollar stores can be very lucrative and their business is hugely expanding," Lanyard said. "Those stores have also generated, as a result of this economy, a new group of customers they didn’t even have before."

Bernard, who studies business management, understands the investors’ thinking about Family Dollar.